TAIWAN: Taiwan high-tech giant sees clean future

by Jeffry Babb

News Weekly, November 23, 2013

The Taiwan Semiconductor Manufacturing Company (TSMC) is one of the world’s great high-tech success stories. Starting from scratch in 1987, TSMC has come to dominate the market niche it created. Last year TSMC earned US$5.6 billion in net profits on turnover of US$17.1 billion.

TSMC is a chip foundry. That is, it makes computer chips, also known as semiconductors. But it does not make its own chips; it makes the chips on behalf of other companies.

To say that other players in the industry thought this was a strange business model is an understatement. TSMC emerged from Taiwan’s Industrial Technology Research Institute (ITRI), an organisation that is similar to Australia’s CSIRO, but with important differences. While the CSIRO seems to chase technology dreams that it imagines will revolutionise science, ITRI concentrates on practical inventions that will give Taiwan’s manufacturers a leg up.

Such is ITRI’s success in practical innovation that now half of its budget comes from intellectual property (IP) royalties. ITRI acts as a brains trust for Taiwan’s manufacturing sector, which is composed mainly of small and medium enterprises (SMEs).

TSMC is anything but small. The company, which is listed on the Taiwan Stock Exchange and the New York Stock Exchange, is capitalised at US$88 billion, about the same as Australia’s Westpac Banking Corporation.

It employs over 30,000 staff in Taiwan alone, many of them the cream of the graduates from Taiwan’s electronic engineering faculties. In a high-tech world, where talent is the primary resource, getting the very best engineering brainpower is one of TSMC’s primary aims

Perhaps it is an exaggeration to say that this enterprise is the brainchild of one man, but few observers doubt that one man did play a key role in getting TSMC up and running from a standing start. That man is Dr Morris Chang, who once worked for Texas Instruments (TI). In 1985, he was recruited by the government of Taiwan to boost the island-state’s high-tech industry.

Chips are made from silicon wafers. They are called semiconductors because silicon is a poor conductor of electricity. Most sand is made of silicon, so it is a plentiful resource. Semiconductors are already very small, but eventually the point will be reached that they cannot be made any smaller and new materials will have to be found.

Chips are a sort of transistor, similar to the ones found in transistor radios. Chips come in a number of varieties, but the two most important ones are logic chips and memory chips. Chips are used in computers, cars, mobile phones and every appliance in the modern home. TSMC estimates there is US$7 worth of their chips in every mobile phone on earth.

A logic chip is a controller or processor. “Logic” implies processing — that is, carrying out a set of instructions. A memory chip holds programs and data either temporarily or permanently. RAM — random access memory — is a temporary workspace.

TSMC specialises in logic chips. They have become more value-added and, as TSMC ascends the value chain, the company works more closely to develop and design the chip. But TSMC makes one thing absolutely clear: they do not compete with their customers. They are a foundry: that is, they make chips to other company’s specifications.

Logic chip production also tends to be a steadier industry sector. By contrast, the market for memory chips, in particular D-RAMs (dynamic random access memory chips), fluctuates wildly.

TSMC, by necessity, conserves much of its materials. Taiwan is a like a mountain range poking out of the sea. The island is half the size of Tasmania. As a result, the rivers are short and flow swiftly, making them difficult to harvest, so TSMC is compelled to conserve water. The company recycles over 80 per cent of its water and aims to reach almost 100 per cent.

Its “fabs” — as its factories are called — are located in all three of Taiwan’s science parks. The science parks aim to create a pleasant environment for staff. Now, TSMC is clothing its fabs in living vertical gardens, which also mitigate the effects of Taiwan’s fierce subtropical sun. The expansive roofs of the fabs are being used to catch the rainwater runoff.

TSMC offers designers and fabless companies the opportunity to reduce capital expenditure and concentrate on their key areas of competence, namely, design — they leave the manufacturing to TSMC. This also reduces the risk to TSMC, as they have a steady business based on fixed contracts. As TSMC becomes more involved in design, it adds value to its products.

Taiwan is not like Australia; it is a tiny island with few natural resources and must live by its wits. The cleaner the industry, the better. TSMC is a clean company. It must also attract top staff, many of whom are footloose international talent who can pick and choose their jobs. They are not likely to be attracted to living in what was called, not so long ago, “a putrid little factory island”.

Jeffry Babb is a Melbourne-based writer, who for many years worked as a journalist in Taiwan.